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Regional Limitations on the Hedging Effectiveness of Natural Gas Futures

Emile J. Brinkmann and Ramon Rabinovitch

Year: 1995
Volume: Volume16
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol16-No3-5
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Abstract:
This paper examines the extent to which limitations in the transportation system for the natural gas market in the United States narrows the effectiveness of the NYMEX natural gas future contract as a hedging instrument and why a second contract with a different delivery point was approved during 1995. We find that the NYMEX contract is an effective hedging instrument for gas sold into pipelines for consumption in southern, eastern and midwestern states, but does, not provide an effective hedge for gas sold for Rocky Mountain and West Coast states.



Customer Risk from Real-Time Retail Electricity Pricing: Bill Volatility and Hedgability

Severin Borenstein

Year: 2007
Volume: Volume 28
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol28-No2-5
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Abstract:
One of the most critical concerns that customers have voiced in the debate over real-time retail electricity pricing is that they would be exposed to risk from fluctuations in their electricity cost. The concern seems to be that a customer could find itself consuming a large quantity of power on the day that prices skyrocket, resulting in a high monthly bill. I analyze the magnitude of this risk, using demand data from 1142 large industrial customers, and then ask how much of this risk can be eliminated through various straightforward financial instruments. I find that very simple hedging strategies�forward purchase contracts that are already used with many RTP programs�can eliminate more than 80% of the bill volatility that would otherwise occur. I then show that a slightly more sophisticated application of these forward power purchases can significantly enhance their effect on reducing bill volatility.



Managing Energy Price Risk using Futures Contracts: A Comparative Analysis

Jim Hanly

Year: 2017
Volume: Volume 38
Number: Number 3
DOI: 10.5547/01956574.38.3.jhan
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Abstract:
This paper carries out a comparative analysis of managing energy risk through futures hedging, for energy market participants across a broad dataset that encompasses the largest and most actively traded energy products. Uniquely, we carry out a hedge comparison using a variety of risk measures including Variance, Value at risk (VaR), and Expected Shortfall as well as a utility based performance metric for two different investor horizons; weekly and monthly. We find that hedging is effective across the spectrum of risk measures we employ. We also find significant differences in both the hedging strategies and the hedging effectiveness of different energy assets. Better performance is found for West Texas Intermediate Oil and Heating Oil while the poorest performer in hedging terms is Natural Gas.



A Risk-Hedging View to Refinery Capacity Investment in OPEC Countries

Hamed Ghoddusi and Franz Wirl

Year: 2021
Volume: Volume 42
Number: Number 1
DOI: 10.5547/01956574.42.1.hgho
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Abstract:
Should oil-rich members of OPEC invest in the oil refinery industry? This is a crucial energy policy question for such economies. We extend theoretical models for a vertical integration strategy within an oil-producing economy, based on a risk-hedging view. The first model highlights the trade-off between return and risk-reduction features of upstream/downstream sectors. The dynamic model demonstrates the volatility of the total budgetary revenue of each sector. Our theory-guided empirical analysis shows that though the average markup in the refining sector is significantly smaller than the profits in the upstream, downstream investment can provide some hedging value. In particular, the more stable and mean-reverting refining margins provide a partial revenue cushion when crude oil prices are low. We discuss the risk-hedging feature of the refinery industry when the crude oil market faces supply versus demand shocks.



Navigating the Oil Bubble: A Non-linear Heterogeneous-agent Dynamic Model of Futures Oil Pricing

Giulio Cifarelli and Paolo Paesani

Year: 2021
Volume: Volume 42
Number: Number 5
DOI: 10.5547/01956574.42.5.gcif
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Abstract:
We investigate short-term futures oil pricing over the 2003–2019 time-period in order to analyze the bubble-like dynamics, which characterizes the 2007–2009 years according to a large body of recent literature. Our research, based on the LPPL methodology and a flexible three-agent model (hedgers, fundamentalist speculators and chartists), confirms the presence of a bubble price pattern, which we attribute to the strong destabilizing behavior of speculators. In our view, this can be related to incorrect interpretation of market signals (or to the inability of trading against the market), especially by fundamentalists, combined with imitation across different categories of agents. This sets off positive feedback reactions along with self-reinforced herding of the kind best detected by the LPPL methodology.





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